In recent years, Internet system has become popular for transmitting and receiving digital data. Because the nature of Internet is an open system, transmitted data is easily copied, altered or even stolen. Hence communication security becomes a major concern. Moreover, digitized multi-media data such as image, video and music signals have been widely transmitted using this open system for its convenience. The problem of copyright protection becomes a most controversial subject. Unfortunately, at the present time, the protection technique is nowhere near perfect. Hence large amount of unauthorized duplication is found daily. In order to resolve this problem, watermarking techniques [1–4] have become a popular tool to protect the secrecy of the transmitted document. To achieve a high performance watermarking, the algorithm must possess properties of invisibility, security and robustness. In recent literatures, most authors [5–7] concentrated on using binary data watermarking, such as “logo” or “text”, the gray-level image watermarking for protecting multi-media data has rarely been discussed. In this invention, a gray-level data watermarking based on sub-band filtering and codebook principles is developed. In order to accomplish a high security watermarking, we avoid using the original data to extract watermark. Instead, we develop a private-key system for protecting watermark, which gives an additional security level.